Diplomat Pharmacy's Valuation Presents Value To A Strategic Buyer, Raymond James Says In Upgrade

Diplomat Pharmacy Inc DPLO shares nosedived Feb. 22 after the company reported a delay in its earnings announcement, citing a charge it needs to record related to its pharmacy benefit management business. .

The pullback presents an attractive opportunity for a potential buyer, according to Raymond James. 

The Analyst

Analyst John Ransom upgraded Diplomat from Market Perform to Outperform and set an $8 price target.

The Thesis

Diplomat's franchise represents value to a strategic buyer given the 56-percent decline in shares since the February earnings delay, Ransom said in the Thursday upgrade note. 

The analyst said UnitedHealth Group Inc UNH, Cigna Corp CI, CVS Health Corp CVS, Anthem Inc ANTM and Centene Corp CNC would make sense as buyers. 

The companies could be interested in Diplomat's infusion franchise and leveraging its larger purchasing scale into lower COGS, Ransom said. The potential suitors may look to integrate Diplomat's now-tiny PBM business and/or fold in the company's large mail order business into an existing platform, with the ability to steer existing members into Diplomat's mail franchise, he said. 

Specialty infusion revenues came in at $705 million in 2018, with margins approaching low double-digits, according to Raymond James. Infusion will likely account for $70 million of the $113 million in 2019 EBITDA and would fetch at least 11-12 times in a sale, according to the research firm's projections.

The Price Action

Diplomat shares were trading up 5.45 percent at $6.19 at the time of publication Thursday. 

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